Chief executives routinely got big pay raises last year despite major downturns at their companies. In the CEO compensation game, it's the ...

Investors in Tampa's young Z-Tel Technologies stock lost 75 cents on the dollar last year. But chief executive Gregg Smith's paycheck barely nudged downward, and an extra batch of stock options sets him up for a nice windfall when shares rise.

At giant AOL Time Warner, losses mounted to $4.9-billion in 2001. Yet CEO Gerald Levin somehow received total compensation of $77-million.

At J.P. Morgan Chase's annual meeting in Tampa last week, bank CEO Bill Harrison deflected a shareholder's criticism of his 75 percent raise (while the bank's shares declined) as if he were waving off a gnat.

Whatever happened to capitalism's grand "pay for performance" movement that was supposed to tie the paychecks of CEOs to the financial ups and downs of the businesses they run?

Judging from this year's corporate proxy statements, which disclose details of chief executive pay packages, far too many performance-challenged CEOs embraced the up and ignored the down. In case after case, top executives of companies whose stock prices have tanked, that fired substantial numbers of employees and closed facilities, still managed to receive an increase in pay.

And many of those CEOs who did not get a raise still avoided substantial pay cuts, even if their workers suffered through the first recession in a decade and an unprecedented slowdown in the aftermath of Sept. 11.

In the CEO compensation game, this year is becoming known as the Great Disconnect, or the CEOs' equivalent of "Heads, I Win, Tails You Lose."

Even among the Tampa Bay area's modest-size companies, most CEOs' pay packages were well insulated from major downturns last year. Of those local, publicly traded companies that struggled -- including Z-Tel (stock down 75 percent, $170.5-million loss), Reptron Electronics (stock down 49 percent, $22-million loss), and even traditionally strong TECO Energy (stock down 19 percent) -- no chief executive was strapped for cash.

Z-Tel's Smith was paid $154,583 in salary (but no bonus) last year, a little less than he received in 2000. Yet Smith also received 400,000 stock options in 2001, compared with 100,000 options the prior year, which will deliver a large bump in compensation if and when Z-Tel stock appreciates.

Reptron chief Mike Musto saw his paycheck trimmed 10 percent to $380,000 last year, still far less than Reptron shareholders saw their stock dive. And TECO chief executive Bob Fagan sustained his salary and bonus of just over $1-million last year, while also receiving a healthy dose of stock options the energy company valued at just under $787,000.

Nice work if you can get it. Still, compared with the big boy CEOs who run giant Fortune 100 companies, our local chiefs are making chicken feed.

CEO pay at large corporations last year averaged $11-million. That's 411 times as much as the average factory worker. Since the start of the 1990s, CEO pay climbed 340 percent, while basic wage increases managed to rise just 36 percent.

Once touted as the new best way to motivate CEOs to maximize company performance, stock options became perverted along the way.

Company boards of directors hand out options (the right to buy company stock at a prearranged "strike" or exercise price) to executives as freely as candy.

Is a company's stock price falling? Give the CEO new stock options with a lower strike price. Is the company's stock price too low for the old options ever to be exercised? Just drop the strike price retroactively.

The most outrageous example of change-the-rules-as-you-go happened at Coca-Cola Co., according to compensation consultants Pearl Meyer & Partners in New York. The Coke board said CEO Doug Daft could have 1-million shares of stock worth almost $60-million if he met specific growth goals. When those goals proved elusive, Coke simply lowered the growth targets to protect Daft.

Coke's not alone. The habit of repricing stock options and lowering goals is contagious. More than 200 companies have swapped or repriced options for executives who are, by layman's standards, already grossly overcompensated.

The result? CEO pay gets increasingly insulated from the risk of decline, but on the upside still balloons -- often by tens of millions of dollars -- when companies prosper.

There's an old business joke about a new CEO who is handed three numbered envelopes by the exiting CEO. "Open these if you run into a problem you can't fix," the departing CEO says.

In a downturn, the CEO opens the first envelope. "Blame your predecessor," reads the message. During a product recall, the CEO opens the second envelope. "Reorganize," it states. When a hostile takeover begins, he opens the third: "Prepare three envelopes."

But now there's a new spin. In each of the three envelopes, it's also written: "First, ask for more stock options."

* * *

At the J. P. Morgan Chase annual meeting in Tampa, a shareholder with a rich New York accent stood and questioned bank CEO Harrison on his lofty $17.5-million compensation earned during a poor year for the company.

Harrison, like the CEOs of all big companies, is well coached. He called on one of his bank's directors, compensation committee chairman and Wyeth pharmaceuticals chairman Jack Stafford, to "answer" the question.

Stafford's response was classic mumbo jumbo, dealing in generalities about how the bank's board had to consider competitive compensation issues. Directors must enroll in special classes to learn how to speak but say nothing.

Listening to Stafford drone from the back of the annual meeting room, I figure that for all the genuine insight offered, the director may as well have belted out that never-ending camp song: Ninety-nine bottles of beer on the wall...

Stafford said CEO Harrison's pay package was not excessive (You take one down, pass it around...)

Stafford said Harrison's bonus had actually declined from the prior year (... 98 bottles of beer on the wall.), and that some portion of his pay was still at risk (You take one down...).

Numbed, the once-feisty shareholder beat a hasty retreat to his seat.

Stock options deservedly get most of the attention these days as the biggest corruption on the CEO compensation scene. But there are plenty of other ways that CEOs distort their companies to help boost their pay. Among them:

Redefining profits: At Walt Disney Co., the normally extravagant CEO Michael Eisner received no bonus and $1-million in total compensation last year, $16-million less than he was paid in 2000. Why? Because Disney, remarkably, lost money. To help their CEO avoid a repeat of this humiliation, Disney directors approved seven items that can now be added back to adjusted net income to boost earnings and make their CEO's performance look better.

Rely on pension plan income: Big companies, including Verizon, IBM and General Electric, boast major retiree pension plans that contribute substantially to the very net income that helps set CEO pay. If pension gains are not part of management's skill, why include them in the pay formula? Consider Verizon top execs Charles Lee and Ivan Seidenberg, each paid about $14-million last year. If pension income of $1.8-billion had not been included, Verizon would have posted a loss in 2001.

How out of hand is the CEO compensation game? CEOs wrote the rules and their boards serve as umpires.

A Boston organization, United for a Fair Economy, puts it this way: If the 555-foot Washington Monument reflects average CEO pay, how tall would be the replica depicting average workers' pay? Just 21 inches. In 1970, the workers' monument would have measured 13 feet, 6 inches.

One of today's gurus (and critics) of out-of-control CEO compensation is former University of California professor Graef Crystal. The way CEO pay trends are going, he says only half in jest, by 2021 the boss of a big U.S. company will be paid more than the firm's entire annual sales.

Crystal's got that wrong. We'll get there long before then.

-- Robert Trigaux can be reached at trigaux@sptimes.com or (727) 893-8405.